Since the introduction of the SEZ Act in June 2005, almost 200 SEZs are now functioning in India. But just a third of these SEZs are formally approved. And many of the SEZs currently in operation are functioning below their capacities. During 2013–14, the latest year for which data on the performance of SEZs are available, total exports from these zones were US$82.4 billion, roughly a quarter of India’s merchandise exports of US$314.4 billion. SEZs clearly are not the main sources of India’s exports, as they were intended to be.
Various factors have impeded the growth of India’s SEZs. Global developments, including economic downturns in India’s major export markets, particularly in Europe and the United States, have stifled growth. Poor export prospects have led to low capacity utilisation in many zones, while others have failed to take off, with exporters refraining from using the facilities in the zones due to low demand.
But global conditions are only one part of the ills plaguing SEZs. The more serious problems affecting these zones emanate from faulty policies. These problems will continue to hamper SEZs even if global prospects improve for Indian exporters.
SEZs were expected to incentivise large-scale export-oriented production in India by offering a gamut of fiscal incentives to manufacturers. These included duty-free import of raw materials and inputs, income tax holidays, and exemption from domestic sales and excise taxes. As a result, many developers found the SEZs attractive propositions.
Most developers visualised SEZs as commercially remunerative real estate opportunities. The zones were envisaged as fully-fledged integrated townships and manufacturing centres with quality residential and industrial facilities. This prospect made SEZs creditworthy projects for banks, enabling developers to easily gain loans.
The biggest problem faced by developers in building SEZs was the difficulty in obtaining land. Some state governments encountered strong political resistance to acquiring land for SEZ development by the private sector. With state governments accused of being ‘brokers’ for industry by forcibly acquiring agricultural land, SEZ projects were mired in controversy. As states began backing off from acquisitions, developers without sufficiently deep pockets were saddled with large debts. For banks, SEZs increasingly became synonymous with non-performing loans and risky ventures.
In hindsight, the previous Congress-led federal government should not have introduced the SEZ scheme without an effective policy on land acquisition. The government didn’t anticipate the problems that arose as land acquisition requirements for SEZs took on unprecedented significance.
The SEZs were also the first occasion on which the government put the onus of developing high-quality export infrastructure entirely on private investors. The assumption was that state governments would facilitate the process by acquiring land on ‘public purpose’. This was a mistaken assumption. The land acquisition process became contentious, leading to the revision of the colonial-era land acquisition law. The new law subsequently enacted by the Congress government in its final year complicated prospects for upcoming SEZs. It significantly increased the rates of compensation for forcibly acquired land and made obtaining consent of a large majority of dispossessed landowners mandatory.
Incentivising SEZs by subsidising exports through fiscal incentives was another short-sighted policy. It led to major standoffs between the Ministries of Finance and Commerce, with the former raising strong objections to revenue foregone through tax exemptions. SEZs continue to be viewed as hurdles to increased revenues and healthier government finances.
Subsidising exports in SEZs also discriminated against non-SEZ exporters. Some exporters, such as software exporters, therefore relocated to SEZs to continue enjoying the benefits of tax exemptions. And, over time, some exemptions had to be withdrawn to comply with WTO rules, reducing the attractiveness of SEZs. The possibility of the Modi government’s withdrawing various tax exemptions for the sake of a more predictable tax policy further reduces the appeal of SEZs for developers.
Rather than subsidising exports, SEZs would have fared better had they been incentivised as enclaves guaranteeing better business conditions through effective infrastructure. But that would have called for a much bigger role for the state in developing SEZs. Many zones may still take off if they are developed as public–private partnership ventures with state governments taking the lead in acquiring land and building the initial infrastructure. Without proactive roles from governments, SEZs might hardly contribute to ‘Make in India’.
Amitendu Palit is Senior Research Fellow and Research Lead in Trade and Economic Policy at the Institute of South Asian Studies (ISAS), National University of Singapore.
India is doomed and the Indian SEZs are doomed.
• The pathetic state of the exports from the SEZ is assessed by the number of non-operative units and the poor capacity utilisation of the SEZ units – information about which is in public and national interest
• The laqck of planning of the GOI is highlighted by the fact that the GOI has done no benchmarking of the operations of the SEZ per se, and the SEZ units within – for each sector with comparable peers,in India or the global competition
• If a sector, say X,exists in a SEZ in a specific maritime geography and its global export hub,is in Country A, and the GOI has not been benchmarking the operating parameters of the Indian SEZ and the SEZ units of that sector (X),every 3 years – then the SEZ units in sector X,in India,will definitely cease to exist,or be in a state of terminal decline or exist at the mercy of competitors
• With the miserable performance of the Indian Rupee,and its impact of reduction in Dollarised Rupee costs payable to the SEZ authority by the SEZ units – why are the exports from the SEZs still a failure? In addition, in several sectors, the rupee costs paid by the SEZ units to the SEZ Authority,are not the determinant for operating and financial viability of the SEZ units
• In essence,the GOI has utterly failed to provide a level playing field to Indian exporters,in terms of admin costs,operating cost neutrality,financing costs,effective logistics costs and fiscal red tape and procedures
• The centres of manufacturing excellence near SEZs (For CMT/Job work/Material and Labour sourcing) are not cost effective – as there is no synergy between the SEZ and the Industrial planning and policy
• The strategy of the GOI is highlighted by the fact that the GOI has engaged no 3rd party to analyse the inefficiency of the operating parameters of SEZs and the SEZ units within the SEZ – for each sector within it , with comparable peers in India,and the global competition
• What planning and strategy will the GOI do,if it has no formal analysis of the specific operating costs,parameters,management and other issues,which explain the dismal state of the SEZ units by sector,scale and management quality
• The dismal state of the GOI planning is that it has not properly planned the sector profile of the units in each SEZ, to ensure that the right sectors are in the appropriate geography,in the right SEZ,to minimise the net logistics costs on the EXIM chain, and minimise the inward material logistics costs – considering the future dislocations in inward and external material sources and options of transhipment and alternative export markets
• Several SEZs elsewhere invest limited equity in SEZ units and common service providers,like banks,facilities,hotels,accounting firms etc,as a demonstration of their stake in the SEZ and their strategic inputs in the planning and operation of the same – which is then used to lower the lease charges – which is completely absent in India
• All of the above is to be seen in light of the fact that the SEZ has no data of the financial or operating performance of the SEZ units,loss making units or even the financial and operating performance of the Developers of the SEZ – and is naturally not concerned with the losses or the financial performance of the SEZ units therein
• The peculiar pattern of CMT and Job workers of key sectors such as Gold and Diamond jewellers,with multiple movement of stocks at different processors o/s the SEZ – is not the norm for Gems and Jewellery SEZs or SEZ units – and represents an abnormal industrial agglomeration with a planned and structural dislocation in manufacturing and processing operations – which cannot be solely for the purposes of manufacturing and commercial efficiency.
• Information on raids and prosecutions is critical especially in sectors with high import duties (on merit mode) for inputs,customised finished goods (wherein DRI/Customs cannot assess over invoicing),frequent movements to and from 3rd party processors (which makes the case for wastages and losses in SION and disappearing materials), materials where the EXIM transit time is a few hours and the logistics costs are less than 1per cent of CIF/FOB rates, inputs and outputs with marked differences in rates of different grades of items and offgrades,warehousing artificial losses,amortisable costs ,bad debts and write offs in select SEZs (to be used for 3rd party exports or mergers to obviate tax on SEZ profits),items where the SEZ units are well aware of the sampling and test checks of the DRI and Customs at the SEZ for the inputs and outputs etc.
• The Gems and Jewellery industry is run by cartels from a particular community spread from Western India to North America,EU,East Asia,West Asia and Africa and is a well coordinated money laundering and smuggling operation from the state of rough diamonds and raw gold,to the marketing of jewellery and warehousing of processed and raw diamonds,the banking chain,raters and the chain of associate and front companies – which is all the more insidious,as all the data with DRI/ED/Customs/Interpol used by the Indian State for surveillance all originated from the overseas counterparts and partners of the Indian traders located in India (who are in many cases – in spirit the same de facto entity owners)
• The premise that Indians are the least cost labour source for the jwellery sector and their informal working style (w/o documentation,using informal labour and in slum style conditions) is an innovative marvel of Indian genius,is a pathetic deception,and the entire array of fiscal and monetary sops for this sector (including SEZ) allows the sector to generate financial buffers via money laundering,tax arbitrage,treasury operations, merchanting exports,accomodation financing ,cash financing, alternative fund transfers,FX speculation,leveraging double and layered financing,defrauding Indian Merchant exporters such as STC and MMTC,Credit insurance fraud etc. which provide the sector a pricing edge in overseas markets ( via illegal,nefarious and fraudulent means)